Last Thursday, Oregon’s Legislative Revenue Office (LRO) presented model results illustrating the impact of a proposed Business Activity TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. , a value-added tax, on Oregon’s economy. This allows us to compare the effect of this proposal against the Commercial Activities Tax, a proposed tax on gross receipts. These tax proposals are part of a broader effort to raise revenue and improve Oregon’s public education system.
LRO uses two sets of models: a short-run model with results projected five years after the proposed taxes are enacted, and a long-run model that incorporates the effects of government spending. The short-run model gives us the best baseline to understand how each tax would affect Oregon’s economy, separate from the effects of Oregon’s government spending.
The first simulation modeled a Commercial Activities Tax of 0.48 percent on gross receipts above $1 million (petroleum exempted), while the second simulation modeled a Business Activity Tax levied on value-added with a 1.4 percent tax rate. Both proposals were designed to raise approximately $1 billion in revenue annually and included identical reductions in Oregon’s personal income tax rates.
|Indicator||Commercial Activities Tax (Gross Receipts Tax)||Business Activity Tax (Value-Added Tax)|
Employment (full-time equivalent jobs)
|-8,400 (-0.31%)||-7,600 (-0.28%)|
|-$11.72 million (-0.06%)||-$41.07 million (-0.22%)|
Net Revenue Impact
|$1.106 billion||$1.013 billion|
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The model results show that the proposed gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. will reduce household income by 0.1 percentage points more on average than the value-added tax and will cost Oregonians about 800 additional full-time equivalent jobs. Prices also increase more under the gross receipts tax proposal than the proposed value-added tax. The 0.05 percentage point difference between the price level is likely the result of tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. , where the same value is taxed multiple times under a gross receipts tax. This leads to higher prices than under a value-added tax, where economic value is taxed only once.
One area where the gross receipts tax performs better in the model is investment. Investment would fall by 0.22 percent under a value-added tax, while a gross receipts tax would reduce investment by only 0.06 percent. This difference may be explained by the exemption of the petroleum sector under the gross receipts tax proposal, but in general, we would not expect a value-added tax to impact investment. We look forward to more detail from LRO on how they are handling the modeling of a value-added tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. .
The model also provides an estimate of the distribution of the tax burden. The gross receipts tax yields a 0.3 percent decline in household income across all income levels, while the value-added tax reduces household income by 0.2 percent for households with income above $34,311. Households with income below $34,311 see a reduction in income between 0.1 percent and 0.2 percent.
These results show that a value-added tax would do less damage to Oregon’s economy while accomplishing the goal of raising the desired revenue. This evidence, combined with broader evidence showing the detrimental effects of gross receipts taxes, should leave little doubt that taxing gross receipts is not the best tax option for Oregon.Share